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Benefits and Costs of Foreign Investment

Economics (Year 12) - Foreign Investment

Christian Bien

Benefits of Foreign Investment

Increased Government Revenue

Foreign investment increases the rate of investment and economic growth. This will increase tax receipts from income, from higher employment and higher business profits as well as tax receipts from expenditures.

Allows for a Higher Rate of Investment

Australia has a savings-investment gap where Australia's small population does not produce enough savings to meet our investment needs. As a result, Australia relies on foreign investment to achieve a higher rate of investment. A higher rate of investment increases aggregate demand and hence, a higher rate of economic growth.

Finances Capital

Foreign investment provides finance for industry to purchase more capital stock. A higher level of capital stock will increase aggregate supply, increasing economic growth and lowering price levels. Capital will increase the international competitiveness of Australia's exports.

Encourages the Transfer of Technology

Foreign direct investment encourages the transfers of new ideas and technologies, which will increase productivity, aggregate supply and international competitiveness. An increase in aggregate supply will increase economic growth and lower price levels.

Finances Economies of Scale

Foreign investment provides the necessary finance to achieve economies of scale. Economies of scale help Australia be more efficient and more internationally competitive.

Costs of Foreign Investment

Loss of Economic Sovereignty

Increases in foreign equity will result in a loss of control of domestic assets. Foreign ownership could dictate domestic assets to go against domestic political or economic agendas. For example, there has been debate over Chinese ownership of the Darwin port as it is used by the Australian Navy and could pose a national security risk.

Increased Vulnerability to an External Shock

Portfolio investment makes up 56% of all foreign investment. Portfolio investment is highly volatile and could see external shocks, such as the GFC, emphasised in Australia by rapid and sharp movements in foreign investment.

Risk of Increased Servicing Costs

When Interest Rates Rise Some foreign debt is variable to which it changes according to changes in interest rates. An increase in interest rates could see Australia's servicing costs on foreign investment also rise, to levels that could be unsustainable or compromising on future generations.

Emergence of a Housing Bubble

A proportion of foreign investment is also invested in the housing market which is an unproductive investment as it does not expand the aggregate supply of an economy. Foreign investment could also see demand for Australian property rise to the point where it is unachievable by first home buyers.

Appreciates the Currency

Increases in foreign investment represent an increase in a credit transaction of the balance of payments which will increase demand for the currency and cause an appreciation of the dollar. An appreciation will cause a contractionary effect as it positions exports as less internationally competitive and imports as more competitive, decreasing net exports.

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